Question

Betty and Anna work at the same office in Calgary. They both must attend a meeting in Edmonton, and they have decided to drive to the meeting together. Betty is a cigarette smoker and her marginal benefit from smoking one package of cigarettes a day is $40. Cigarettes are $6 a pack. Anna dislikes cigarette smoke and her marginal benefit from a smoke-free environment is $50 a day. If Betty drives her car with Anna as a passenger, ________. If Anna drives her car with Betty as a passenger, ________.

A) Anna will offer Betty an amount between $34 and $50 and Betty will not smoke; Betty does not smoke because Betty will not offer Anna a high enough price to be allowed to smoke.
B) Betty will smoke because she owns the property rights in the car; Betty does not smoke because Betty will not offer Anna a high enough price to be allowed to smoke.
C) Betty will smoke because she owns the property rights in the car; Betty will offer Anna $51 and Betty will smoke.
D) Anna will offer Betty an amount between $34 and $50 and Betty will not smoke; Betty will offer Anna $51 and Betty will smoke.
E) Betty will smoke because she is the car owner; Betty will offer Anna an amount between $34 and $50 and Betty will smoke.

Answer 1

In the scenario with Betty and Anna, property rights and willingness to pay determine who controls the environment in the car regarding smoking. The correct answer is Option A, where a compromise is reached based on their marginal benefits.

Step-by-step explanation:

Economics of Smoking and Property Rights

Let's break down the scenario involving Betty and Anna, considering property rights and the concept of marginal benefit. Since Betty's marginal benefit from smoking is $40 and cigarettes cost $6, her net benefit is $34 ($40 - $6). Anna values a smoke-free environment at $50.

If Betty drives, she has property rights and would naturally smoke. However, if Anna values a smoke-free environment more and is willing to pay for it, they can negotiate. They could agree on a price between $34 and $50; let's say $42. Anna pays Betty $42, Betty refrains from smoking, and they both gain since Betty gets more than her net benefit, and Anna pays less than her marginal benefit.

If Anna drives, she owns the property rights and prefers a smoke-free environment. Betty would need to offer more than $50 for Anna to allow smoking. Since Betty's net benefit is $34, she's unlikely to offer higher than Anna's marginal benefit of $50. Therefore, Betty will not smoke.

The right answer in this context would be Option A: Anna will offer Betty an amount between $34 and $50 and Betty will not smoke; Betty does not smoke because Betty will not offer Anna a high enough price to be allowed to smoke.